• 2023.04.25
  • M&A

Use of Requests for Sale of Shares, etc. by Special Controlling Shareholders

Causes of share dispersion

After a company has been in operation for a long time, its shares may be dispersed among a large number of people before long. There are various possible reasons for the dispersion of shares, such as multiple people financing the start-up of the company, partial transfer of shares to participants in the management of the company, or inheritance to the founder. Even in a small closed company, the ownership of shares by more than one person is not in itself a very significant obstacle to the management of the company. Of course, when there is more than one shareholder, it is often required to fulfill procedures, such as holding a general meeting of shareholders, in accordance with the provisions of the Companies Act. In the past, there may have been many cases where only minutes were prepared for reasons such as being necessary for registering the appointment of directors and officers, even though neither a board of directors meeting nor a shareholders’ meeting was actually held, but recent trends in judicial precedents indicate that even if only minutes were prepared without issuing a notice to shareholders, such a meeting is often deemed invalid. Therefore, an increasing number of companies, even small closed companies, are holding shareholders’ meetings in accordance with the provisions of the Companies Act.

Necessity of Purchasing Shares from Minority Shareholders

When the controlling shareholders of a company own two-thirds or more of the company’s shares, a special resolution of the shareholders’ meeting can be passed even if there is opposition from minority shareholders, so most proposals, including amendments to the articles of incorporation and organizational changes, can be decided freely. In addition, since the election of directors is usually made by a majority, the majority shareholders are usually able to appoint all directors. Therefore, from the viewpoint of corporate control and management, the existence of minority shareholders itself is a problem in only a limited number of cases. On the other hand, in the case of corporate reorganization, dissenting shareholders can demand that the company purchase their shares, and if there is a dispute over the share price, a petition must be filed with the court, etc. It is true that the presence of minority shareholders imposes many procedural burdens. Therefore, especially when a company is considering M&A, there may be many opportunities to consider transferring shares after purchasing minority shares in advance and making the company 100% controlled by the majority shareholders.

Purchase of Shares

The way to purchase such shares is, of course, to have a voluntary negotiated sale and purchase, so the company or controlling shareholder will have a discussion with the minority shareholders to see if they would be willing to transfer their shares to the minority shareholders. Since this is an arms-length transaction, there is no restriction on how much the transfer price must be. Generally, the share price is calculated based on the net asset value, and the transfer is proposed at that price. Of course, taking into account the situation of minority shareholders, we often propose a share price several times the net asset value. As for the purchase method, the transfer is completed simply by making a written offer to purchase, paying the price for the shares to those shareholders who accept, and changing the shareholder register. However, if the company itself is the purchaser, it is necessary to pay attention to financial resource regulations and tag-along rights.

Procedures for Special Controlling Shareholder’s Request for Sale of Shares, etc.

There is no problem if the company is able to purchase the shares by the method described above, but for shareholders who only own a few shares, they are often opposed to transferring their shareholder status for a small amount of money such as several tens of thousands of yen. In such cases, class shares subject to wholly call or the establishment of a wholly owned subsidiary through a corporate split were previously used as a method of compulsory purchase. However, the 2014 amendment to the Companies Act newly stipulates the method of demand for sale of shares, etc. by a special controlling shareholder, and the procedures for reverse stock split have been developed. Article 179 of the Companies Act provides detailed provisions on the procedures for a demand for sale of shares by a special controlling shareholder. When making a demand for sale of shares to a minority shareholder, it is first important to read and understand this article carefully.

What is a Special Controlling Shareholder?

Article 179, Paragraph 1 of the Companies Act provides that a special controlling shareholder of a stock company may demand that all of the stock company’s shareholders sell all of their shares to the special controlling shareholder.
Here, a special controlling shareholder is a shareholder who holds 90% or more of the voting rights of the outstanding shares of the company. The special controlling shareholder may be an individual or a corporation, but in either case, a request for purchase may be made. However, the law requires that one person or one corporation must own 90% or more of the shares. Therefore, since the combined shares of the sister and brother exceed 90%, it would not be possible to immediately try to make a purchase claim against the uncle who owns less than 10% of the shares.
If there is no shareholder who owns more than 90% of the shares, the company will have to consider other methods such as a reverse stock split, or the principal shareholder will have to purchase shares from other shareholders to acquire more than 90% of the shares and then file a request for purchase. Under the law, it is sufficient to own 90% or more of the shares at the time of the share purchase request, so it does not matter whether or not the shares were purchased from the other shareholders in advance. However, the actual purchase and sale of the shares must be conducted, and a hypothetical purchase and sale in order to create the appearance of owning 90% or more of the shares is not permitted. If the purchase and sale itself is a sham, there is possibility that the request for purchase of shares itself will be declared invalid at a later date, or that the duty of care of a director will be called into question.

Request for purchase of stock acquisition rights

When a special controlling shareholder requests the purchase of shares, he/she may also request the purchase of stock acquisition rights (Article 179, Paragraph 2 of the Companies Act). Even if all the shares are acquired through the purchase of shares, if a third party subsequently exercises the subscription rights and becomes a new shareholder, the purchase of shares will be meaningless. Therefore, when a company that has issued stock acquisition rights requests the purchase of its shares, it is expected that the stock acquisition rights will also be requested to be purchased. The purchase of a portion of the stock acquisition rights is not allowed, and when a request for purchase is made, it is necessary to request the purchase of the entirety of the stock acquisition rights. The reason why the title of the Companies Act is “demand for sale of shares, etc.” and the word “etc.” is included is that stock acquisition rights are also subject to a demand for sale.

Method of demand for sale of shares, etc.

When a special controlling shareholder makes a demand for sale of shares, etc., the special controlling shareholder must notify the company of the approval of the demand for sale, setting forth the purchase price of the shares or the method of calculating the purchase price, the date on which the shares will be acquired (acquisition date), and the method of financing the purchase, and obtain approval by the company’s board of directors. The company’s board of directors resolves whether or not to approve the request and notifies the special controlling shareholder who made the request for approval. Since the special controlling shareholder owns more than 90% of the shares, in many cases, most directors are effectively elected by the special controlling shareholder. Therefore, it is unlikely that the board of directors would reject the special controlling shareholder’s request. However, directors owe a duty of care to minority shareholders, and if they approve an unreasonable purchase request, it could be said that the directors have breached their duty of care. Therefore, the company’s directors should consider the information provided by the special controlling shareholder and the company’s situation (i.e., what is a fair share price) and make a decision accordingly.
If the company approves (by resolution of the board of directors) the special controlling shareholder’s request for sale, the company must notify the special controlling shareholder at least 20 days prior to the date of acquisition that it has approved the request for sale, the name, address, consideration, and date of acquisition. However, public notice may be substituted for individual notice, so in cases where there are a large number of minority shareholders, public notice may be substituted for individual notice.

When a minority shareholder opposes a demand for sale of shares

If a special controlling shareholder makes a demand for sale of shares, the minority shareholder whose shares are to be sold (in the law, the “selling shareholder, etc.”) may petition the court for a determination of the sales price of the shares to be sold held by the minority shareholder, etc. during the period from 20 days prior to the acquisition date to the day before the acquisition date. For example, if a special controlling shareholder offers to acquire the shares for 50 yen per share, but the minority shareholder believes that the price is unreasonably low and that it is reasonable to acquire the shares for at least 1,000 yen per share, the minority shareholder may petition the court to raise the trading price to 1,000 yen instead of 50 yen.
Special controlling shareholders holding 90% or more of the shares will be able to forcibly acquire shares from minority shareholders by way of a demand for sale, which is permitted under the revised law, and this petition for determination of the trading price will probably be the most common way for minority shareholders to counter unfair claims.
On the other hand, minority shareholders often hold only a few shares, so even if there is a possibility that the share price may increase several times, there is a question whether it is economically reasonable to file a suit in court when considering the cost of a trial. Therefore, if a minority shareholder suggests that the purchase price is unreasonably low, the special controlling shareholder will probably reconsider the purchase price and re-propose a price that is acceptable to the minority shareholder.
On the other hand, there are restrictions on the period and method of withdrawing a demand for sale of shares, so it is not possible to withdraw only that shareholder’s portion. Therefore, in some cases, it would be possible to withdraw all purchase requests and make a new request with a new price. Conversely, if such a situation is reached, it is possible that the minority shareholders concerned may believe that they have reached an agreement with the minority shareholders regarding a voluntary purchase of their shares. Therefore, if there is a dispute about the price of the shares, the law requires that an action be filed with the court and the price be determined by the court. In practice, however, the minority shareholder may file a petition against the company claiming that the price is unfair, and discussions may be held with the special controlling shareholder to increase the purchase price. From this perspective, even if the minority shareholders feel that the purchase price is unreasonably low, or if they oppose the purchase, but do not have to petition the court, it would still be reasonable for them make a claim alleging that the purchase price is unreasonable. Conversely, since a demand for sale of shares by a special controlling shareholder is a compulsory purchase of shares, it has the potential to cause friction with minority shareholders as an inherent element of the system. If the minority shareholder requests that the purchase price is unreasonable and voluntary discussions can proceed and a voluntary purchase can be made, then that method may be preferable.

Documents to be filed in advance and documents to be filed after the fact

Under the Companies Act, companies are required to keep certain documents before and after the sale. It is considered to provide necessary information for minority shareholders who oppose the sale request and for those who contest the sale request procedure.

Countermeasures against minority shareholders (temporary restraining order)

In addition to filing a petition to the court for determination of the purchase price as described above, a minority shareholder may also request the court to stop the acquisition of shares, claiming that it will be unfairly disadvantaged. As a minority shareholder, when filing a motion for temporary restraining order, you may claim that the sale request violates laws and regulations and that the procedure has been violated.

Acquisition of appraisal report of share price

In a demand for sale by a special controlling shareholder, the special controlling shareholder decides by itself how much the purchase price will be. Therefore, it is important to find a way to ensure the appropriateness of the purchase price by the special controlling shareholder. Since a demand for sale is inherently subject to friction with minority shareholders (if there is no friction, the purchase is considered to have been effected through voluntary purchase), the special controlling shareholder should be prepared to obtain an appraisal of the share price by a certified public accountant or other qualified person before making a demand for sale. In addition, if the company does not receive sufficient data from the special controlling shareholder regarding the basis for the calculation of the stock price, it is necessary for the company to obtain a fair appraisal of the stock price by requesting a certified public accountant or tax accountant to do so prior to the approval of the demand for sale. In preparing the schedule for the demand for sale, it will be necessary to ensure not only the 20-day period mentioned above, but also time for a certified public accountant or tax accountant to appraise the stock price.